The Vita Coco Company - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered strong top-line growth: net sales rose 17% to $168.76M; diluted EPS of $0.38 beat consensus, while reported EBITDA was pressured by higher freight and initial tariff impact. EPS and revenue topped S&P Global consensus; EBITDA came in below consensus on a GAAP basis but adjusted EBITDA was resilient.*
• Guidance was raised for full-year net sales to $565–$580M, while gross margin was tightened to ~36% and adjusted EBITDA maintained at $86–$92M, signaling confidence in demand but caution on cost headwinds.
• Key positives: Vita Coco Coconut Water net sales up 25% globally; International net sales up 37%; Treats rollout contributed meaningfully to “Other” category; healthy cash balance ($167M) and no debt.
• Key pressure: Gross margin fell to 36.3% (from 40.8% in Q2’24) on elevated ocean freight, finished goods costs, and baseline 10% tariffs; SG&A increased on marketing, personnel, bad debt reserves, and rent overlap.
• Near-term stock catalysts: raised revenue guidance; tariff trajectory and mitigation; margin cadence (Q3 sequentially lower; Q4 improvement); Walmart reset prospects and Treats distribution expansion.

What Went Well and What Went Wrong

What Went Well

• Vita Coco Coconut Water net sales grew 25% globally; Americas +22% and International +43%, driven by category strength and improved inventory/service levels.
• International segment strong: net sales +37% YoY with coconut water +43%; momentum in U.K. and Germany from targeted investments.
• Raised FY25 net sales guidance to $565–$580M; Treats national rollout supporting top line alongside high-teens branded growth assumptions.

Quotes:

• “For the quarter, Vita Coco Coconut Water net sales grew 25% globally… We believe this growth is being fueled by our investment as the category leader… driving increased household adoption and new consumption occasions.” — Michael Kirban.
• “Our exceptionally strong shipment performance… benefited from very strong demand… and great execution from our teams.” — Martin Roper.

What Went Wrong

• Gross margin compression: consolidated GM fell to 36.3% from 40.8% YoY due to higher ocean freight rates, finished goods costs, and baseline 10% tariffs.
• SG&A increased to $36.14M (+$7M YoY) on increased marketing, personnel costs, higher bad debt reserves, and overlapping rent; adjusted EBITDA declined YoY to $29.24M.
• Private label declines: Americas private label net sales fell 37% to $14.69M amid expected transitions; management flagged turbulence in PL comps near-term.

Transcript

Moderator (participant)

Hello, and welcome to The Vita Coco Company's second quarter 2025 earnings conference call. My name is Michelle. I'll be coordinating your call today. Following prepared remarks, we will open the call to your questions with instructions to be given at that time. I'll now hand the call over to John Mills with ICR. Please go ahead.

John Mills (Managing Partner)

Thank you, and welcome to The Vita Coco Company second quarter 2025 earnings results conference call. Today's call is being recorded. With us are Mr. Mike Kirban, Executive Chairman, Martin Roper, Chief Executive Officer, and Corey Baker, Chief Financial Officer. By now, everyone should have access to the company's second quarter earnings release issued earlier today. This information is available in the Investor Relations section of The Vita Coco Company's website at investors.thevitacococompany.com. Also on the website, there is an accompanying presentation of our commercial and financial performance results. Certain comments made on this call include forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on management's current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and other filings from the SEC for a more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. During the call, we will use some non-GAAP financial measures as we describe our business performance. Our SEC filings, as well as the earnings press release and supplementary earnings presentation, provide reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures and are available on our website as well. It is my pleasure to now turn the call over to Mr. Mike Kirban, our co-founder and Executive Chairman.

Mike Kirban (Co-Founder and Executive Chairman)

Thanks, John, and good morning, everyone. Thank you for joining us today to discuss our second quarter financial results and our expectations for the balance of 2025. I want to start by thanking all of our colleagues across the globe for our continued strong performance, particularly in a dynamic environment, and for their commitment to The Vita Coco Company and advancing our mission of creating ethical, sustainable, better-for-you beverages that uplift our communities and do right by our planet. In the second quarter, we continued to see strong performance against our key initiatives. Coconut water remains one of the fastest growing categories in the beverage aisle, growing 20% year to date in the U.S. and 35% in the U.K. based on Circana data.

This, coupled with the acceleration of the emerging German market, has resulted in very strong global net sales performance for our second quarter and similarly strong reported gross profit, net income, and adjusted EBITDA. Year to date, according to Circana, Vita Coco Coconut Water continues to perform very well, growing 16% in retail dollars in the U.S. and growing 39% in the U.K. In 2025, our U.S. commercial initiatives include emphasis on Vita Coco Multi-Packs, Vita Coco Farmers Organic, and Vita Coco Juice, the expansion of our SKUs in convenience stores, continued investment in our foodservice efforts, and the national launch of Vita Coco Treats. We're excited about the initial performance of Vita Coco Treats in the U.S. and for the future of innovative coconut milk-based beverages, which creates new usage occasions that could offer us yet another path for long-term growth.

According to Circana, Vita Coco Treats would have added 4% to the growth rate of Vita Coco Coconut Water in the second quarter U.S. retail scans if reported as a consolidated brand family. This is a good start, but we still have a lot of work to do. Year to date, our international business is very healthy and accelerating, with strong performance in Europe. Our increased investment this year in the U.K., Germany, and other select European markets is paying off, with healthy growth and brand share wins, and we intend to continue our focused investment in select markets in an effort to drive long-term gains. In our investor presentation on June 4th, which is available on our Investor Relations website, we laid out an index for estimated consumption per capita for coconut water in our current major markets. While the U.S.

is the most developed market, household penetration is still well below other juices like cranberry juice or orange juice, and our current Vita Coco Coconut Water growth in the U.S. is coming from both growth in households and growth in velocity per household through consumption occasion expansion. We're excited about the current performance and believe that we can at least double the U.S. coconut water category in the coming years. We believe that the coconut water category is still in its infancy in markets outside of the U.S. and that there is significant long-term potential as these markets develop. We're very proud to be the leading brand in our primary markets and the primary driver of this category growth.

Over time, we believe our international business will become a larger part of our consolidated growth story, and I expect our European operations could eventually be as large as our Americas businesses today. In summary, the acceleration of the category that we saw in late 2024 has continued through the first half of 2025, and with our significantly stronger inventory position, strong retail programming and innovation, and additional production capacity, I believe that we are well positioned to continue our growth, and I'm excited for the remainder of the year. Now, I'll turn the call over to our Chief Executive Officer, Martin Roper.

Martin Roper (CEO)

Thanks, Mike, and good morning, everyone. I'm pleased to report The Vita Coco's continued strong performance in the second quarter. Net sales in the quarter were up 17%, driven by growth of the Vita Coco Coconut Water of 25%, benefiting from strong growth in the coconut water category and improvements in our own available inventory and service levels. We also saw a 102% growth in our other products category, primarily representing the positive impact from Vita Coco Treats. Our branded scan results in the U.S. were very strong, although slightly behind category growth due to the drag in our scans, primarily created by the changes in the Walmart set late last year. Our Walmart trends improved slightly during the quarter, but were still down high single to low double digits, creating an estimated low single-digit drag on our total U.S. branded scan trends in the quarter.

We have had preliminary discussions with Walmart about the next potential reset. Based on those discussions, we expect an improvement in distribution with a joint goal of attracting coconut water category shoppers to Walmart. If these plans are implemented, we believe that Walmart will become a growth engine for our brand in 2026 and beyond. The second quarter saw the impact of the private label transition that we expected and referenced in February. The private label business remains strategically important to us, and we continue to bid on select private label opportunities. We believe we are very competitive in these bids and recently secured new private label business, which will benefit us in 2026.

Our gross margins were down in the quarter relative to last year due to a number of inflationary cost factors, including higher ocean freight rates, cost of goods inflation due primarily to the addition of new capacity, and the initial impact of the 10% baseline tariff, which started to hit our P&L late in Q2. We believe ocean freight rates are still elevated relative to historical levels, and we are operating primarily on spot rates with some fixed price arrangements on certain lanes to secure capacity. With U.S. tariff outcomes uncertain, we expect short-term volatility in ocean freight rates, but believe that rates should decline on average through the balance of the year. If we see competitive fixed rate offers for long-term contracts that make sense to us, we would be willing to enter into fixed rate agreements to cover more lanes.

Entering the third quarter, we have significantly more Vita Coco Coconut Water inventory than at the same time last year and expect a very strong third quarter for our branded business as we lap major service issues and reduce promotional activity from last year. In the second half of the year, we plan to use our improved inventory position to drive consumer trial and to secure incremental promotional opportunities where available. We believe that the strong category growth is a positive indicator for future growth and supportive of our long-term branded growth algorithm. For 2026, we have secured adequate production capacity to support continued branded growth and to support our expected private label relationships. Our planned U.S.-based price increase in May to cover inflationary cost of goods pressures produced an approximately 7% increase at U.S. food retail, according to Circana over the quarter.

The initial consumer reaction to these increases has been in line with our expectations, but it is too early to fully understand any long-term price elasticity impacts. We're currently assuming that the baseline U.S. tariff rate of 10% continues, which, as we noted last quarter, applies to approximately 60% of our global cost of goods sold. We are currently executing U.S. retail price increases to cover the unmitigated tariff costs of this baseline rate. With our diversified supply chain and the important role of coconut water in our consumers' lifestyles, a healthy category, and our brand strength, we believe that we can navigate any additional tariff impacts. Given the uncertainty on the timing and sizing of any additional tariffs above the baseline 10% rate and the uncertainty of the lead time and impact of implementing any mitigating activities, we are not including any such announced tariffs in our outlook.

We have a global diversified supply chain sourcing primarily from the Philippines and Brazil, with some additional sourcing from Thailand, Vietnam, Sri Lanka, and Malaysia, which gives us flexibility to react to any long-term tariff changes. To summarize, our category is very healthy, our brand is performing, and our supply chain is supporting growth and provides us with flexibility to mitigate the potential tariff impacts long term. We are confident in our team's ability to execute and deliver on our plans, and for the full year 2025, our confidence in the category and Vita Coco brand trends remains very high. We believe that longer term, we will benefit when ocean freight rates return to historical levels, and this should allow us to achieve or beat our long-term financial targets. With that, I will turn the call over to Corey Baker, our Chief Financial Officer.

Corey Baker (CFO)

Thanks, Martin, and good morning, everyone. I will now provide you with some additional details on the second quarter 2025 financial results and our outlook for the full year. For the second quarter of 2025, net sales remained very healthy, increasing $25 million, or 17% year-over-year, to $169 million. Vita Coco Coconut Water grew 25%, partially offset by private label declines of 25%, where we have begun to see the impact of the private label losses we discussed last quarter. On a segment basis within the Americas, Vita Coco Coconut Water increased net sales 22% to $120 million, and private label decreased 37% to $15 million. Vita Coco Coconut Water saw a 21% volume increase and a slight net price mix benefit, while private label sales were driven by a 34% decrease in volume and a 3% decrease in price mix.

For the second quarter of 2025, our international segment continued to deliver strong results, with net sales up 37% and Vita Coco Coconut Water growing 43%, driven by strong growth across all our major markets. Private label sales increased 29% due to strong sales of private label coconut water. For the quarter, consolidated gross profit was $61 million, an increase of $3 million versus the prior year. On a percentage basis, gross margins finished at 36% for the quarter. This was down approximately 450 basis points from the 41% reported in Q2 2024. This decrease in gross margins resulted from higher year-over-year ocean freight rates, higher finished goods product cost, and the 10% baseline tariff that began to impact our gross margins late in the quarter. This was partially offset by a favorable product mix.

Moving on to operating expenses, SG&A cost increased $7 million to $36 million within the quarter, driven by increased market expenses, higher people-related costs, increased reserves for bad debt, and overlap of rent expense for our new office. Net income attributable to shareholders for the quarter was $23 million, or $0.38 per diluted share, compared to $19 million, or $0.32 per diluted share for the prior year. Net income benefited from higher gross profit and a larger unrealized gain on derivatives and a lower year-over-year tax rate, partially offset by higher year-over-year SG&A spending. Our effective tax rate for Q2 2025 was 19%, versus 25% last year, which is primarily driven by discrete tax benefits and a favorable geographic mix of pre-tax profits. Q2 2025 adjusted EBITDA was $29 million, or 17% of net sales, compared to $32 million, or 22% of net sales in 2024.

The decrease in adjusted EBITDA was primarily due to the higher SG&A expenses, partially offset by higher year-over-year gross profit. Turning to our balance sheet and cash flow, as of June 30th, 2025, our balance sheet remained very strong, with total cash on hand of $167 million and no debt under our revolving credit facility. Our accounts receivable increased by $39 million versus December 31st, 2024, primarily due to increased net sales within the quarter. We exited Q2 with a very strong category in the Americas and Europe, healthy inventory levels, exciting innovation, and confidence in our team's execution and our Vita Coco brand. Our updated guidance reflects our current best assumptions of marketplace trends, competitor price actions, and our expected price elasticity under a 10% baseline tariff environment, and an assumption that ocean freight rates will soften through the balance of the year.

We are confident in our ability to continue to deliver strong top-line performance and therefore are raising our full-year net sales guidance to between $565 million and $580 million. We expect gross margins at the midpoint of our prior guidance range are approximately 36%, with SG&A growing low to mid-single digits, resulting in full-year adjusted EBITDA of $86 million to $92 million. We are now expecting Vita Coco Coconut Water sales to grow in the high teens, with incremental growth coming from Vita Coco Treats, partially offset by the weakness in our private label business. We expect strong Q3 net sales performance as we lap the inventory shortages of last year, with a tougher Q4 net sales comparable to the benefit of distributor and retail inventory replenishment. We are expecting gross margins for the full year of approximately 36%.

We expect gross margins to be sequentially lower in Q3 due to the timing of tariff impacts and mitigating pricing actions, as well as temporarily higher ocean freight rates blowing through the P&L, with Q4 gross margins sequentially improving. We expect full-year SG&A to increase in the low to mid-single digits due to increased people investments, including increased incentive and stock compensation and other focused investments to support the delivery of our growth objectives as we aim to maintain our strong branded growth momentum into 2026. With that, I'd like to turn the call back to Martin for his closing remarks.

Martin Roper (CEO)

Thank you, Corey. To close, I'd like to reiterate our confidence in the long-term potential of The Vita Coco Company, our ability to build a better beverage platform, and the strength of our Vita Coco brand and the coconut water category. We are confident in our ability to navigate the current environment and are excited about our key initiatives to drive growth. We have a strong brand and a solid balance sheet, and we are well positioned to drive category and brand growth both domestically and internationally. Thank you for joining us today, and thank you for your interest in The Vita Coco Company. That concludes our second quarter 2025 prepared remarks, and we will now take your questions.

Moderator (participant)

Thank you. To ask a question at this time, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment while we compile our Q&A roster. Our first question is going to come from the line of Kaumil Gajrawala with Jefferies. Your line is open. Please go ahead.

Kaumil Gajrawala (MD Beverage, Household Products, and HALO Strategy)

Hey, everybody. Good morning. I guess a couple of things. The first on revenue, obviously doing very, very well. Can you maybe, is it possible to parse out how much of that is sort of, you know, inventory rebuild and such now that supply is in a place where you'd like it to be versus, you know, some equivalent of like same-store sales type of trends? With Treats and Treats going national, is that, is it happening? Has it already happened? Is there just anything in the figures that we should be aware of as it relates to that contribution?

Martin Roper (CEO)

Sure. Good morning. On the scan, the retail scan side is obviously reflective of healthy inventory, but we had healthy inventory in Q2 of last year. I wouldn't say that any of the scan trend data is reflective of easy comparables. We will certainly see that in Q3, but I wouldn't say that in Q2. Relative to Treats, we rolled Treats nationally, sort of ended Q1 in the U.S. It was also introduced in the U.K. I would say that's national and we have good coverage. We didn't get complete retailer authorizations everywhere, but for a first step, it was very good. I think what you're seeing on shipment certainly is the launch in Q1, which would obviously have benefited a little bit from inventory fill of the pipeline.

Q2 is probably more reflective of potential ongoing state, but obviously until you get repeat going, we don't really know what the ongoing rate of sales are. We're very happy right now. I think as we indicated, it's added a little bit to our total branded scan volumes in Circana in the U.S. Importantly, Circana, depending on how you buy it on Nielsen, may only report coconut water. Treats is a coconut milk-based beverage and may be outside of the visible Vita Coco brand trends that people see depending on what data they have.

Mike Kirban (Co-Founder and Executive Chairman)

Just add a couple of things. I think in terms of growth, household and consumption per household are growing really fast, and that is probably the biggest driver of the growth as the category is mainstreaming. In terms of Treats, like Martin mentioned, yeah, we had a national rollout, but it was with specific retailers. There is a lot of distribution to be had, which will be pitched coming up in the next month or two for next resets, which would be next March. There are a lot of opportunities to still build distribution on it.

Corey Baker (CFO)

The one thing I'd add on the top-line growth, Kaumil, is the international business is very, very strong, growing over 40% in the quarter and not really impacted at all by any out-of-stock. Small amount, it is mostly consumer growth in the U.K. and Germany.

Kaumil Gajrawala (MD Beverage, Household Products, and HALO Strategy)

Okay. Got it. Actually, that brings up another question, but I wanted to, on international, should we, how should we be just thinking about sort of scale mix effect margin? Is, you know, I'm looking at your, you know, your SG&A has come up and there's been a lot of people and a lot of other investments in the brands. How are you sort of, are you sort of spending up ahead of growth? Are you looking to maybe catch up? Because obviously growth is, you know, quite substantial and you need maybe a higher base of investment. How are you sort of thinking about that between domestically and internationally?

Corey Baker (CFO)

From an SG&A perspective, we are investing, I'd say, a little bit ahead of the curve, and we're making strategic investments. We've talked about first Germany with increased SG&A marketing, and as we look to expand, not doing anything excessive. It's not catch up. To support the growth we're seeing in both markets, we've been investing in supply chain resources to ensure we have the supply, the right quality, the right factories to support that growth. Our SG&A is growing mid-single digits, investing ahead of the curve, but nothing crazy, I'd say.

Kaumil Gajrawala (MD Beverage, Household Products, and HALO Strategy)

Got it. Thank you.

Moderator (participant)

Thank you. One moment as we move on to our next question. Our next question is going to come from the line of Bonnie Herzog with Goldman Sachs. Your line is open. Please go ahead.

Bonnie Herzog (MD)

All right. Thank you. Good morning, everyone. I had a couple of questions on your guidance. First, you raised your top-line growth and essentially narrowed your gross margin guidance, but maintained your EBITDA guidance, which I guess implies less leverage. Just trying to understand maybe what changed there. Second, your full-year EBITDA guidance does imply a lot faster growth in the second half of about 22% versus the decline you saw in the first half. I realize the year-over-year compares are easier in the back half, but just hoping you could give us a little bit more color on the drivers of this expected acceleration.

Martin Roper (CEO)

Sure. Let me take it and then maybe Corey can cover up for what I might maybe miss. I think we obviously feel very good about our branded top line, and I think that's driving the increase in our guidance as we look out on the back of the year. Certainly, in the second half of the year, we're going to benefit from very easy comparisons in Q3 relative to the out-of-stocks that we had last year. There is a little bit of a swing back in Q4 where Q4 last year we benefited from replenishing the inventory, but we have some pretty easy comparisons. We feel pretty good. I think on the gross margin side, frankly, we struggle on guidance. We're saying it's approximately 36%, and we're pretty obviously comfortable with that.

That's a tightening, I suppose, from 35%-37%, but I don't think we really wanted to do 35.5%-36.5%. It felt sort of silly. What I would say on the cost side is we've got a number of factors going on. There is obviously some higher ocean freight that we experienced in Q2 from the spike that occurred in the indexes that will obviously flow through into our P&L in the second half of the year. That was unexpected. When we last talked to you, we now have a little bit of clarity on the timing of the tariff impact relative to mitigating actions, and there's a little bit of lag on the mitigating actions. That's also a headwind on the cost of goods side.

That's pulling cost of goods higher, I suppose, than perhaps we would have anticipated, and that's how the whole thing sort of fell together. Corey, if I missed anything, dive in.

Corey Baker (CFO)

Maybe just two things. One, we talked about in the prepared remark, the pricing is starting to hit the market, but there were some factors and some mix that drove it a little bit later than expected, which pressures the Q3 margins a bit. Our SG&A, we talked about last quarter, is a bit more aligned with our sales curve throughout the year. In part, as we look into the back here, we do see some increased incentive comp and stock comp that drives a little bit of variance. Overall, that's how the guidance came together.

Bonnie Herzog (MD)

Okay, that's helpful. Just to summarize, you're feeling good about the top line, the momentum, what you have planned in the back half, but maybe just some conservatism based on, or despite, the freight rates declining throughout the year and just kind of talking through some of the other cost pressures or headwinds that you're facing. Is that how we should think about it?

Corey Baker (CFO)

Yes. With what Martin was saying, there was higher ocean freight earlier in the summer that will flow through in Q3. Our ability to frame rates continue to drop. Much of that will flow into next year at this point. We do not see as much ocean freight tailwind as maybe you would think.

Bonnie Herzog (MD)

That helps. Maybe a follow-up just in terms of reinvestments or, you know, like the SG&A was up quite a bit in Q2. Any more color on that? With you guys maintaining the SG&A guidance for the year, it does imply slower SG&A growth in the second half. If you could, I don't know, drill down a little bit on the SG&A line, just kind of help us understand general expense versus some of the marketing, and how we should think about your reinvestment needs in the second half. Thank you.

Corey Baker (CFO)

Yep. The largest was marketing spend in the first half, and that is a combination of the Treats, the rollout, a bit of timing overall in the full-year marketing. The people cost, as I discussed earlier, led by international, is the second largest bucket, as well as some incentive comp and stock comp items that ultimately would be adjusted out of the EBITDA. We had a couple, they're smaller but unique items, our bad debt reserves, which is just a calculation on our current accounts receivable increase this year versus actually income last year. A bit of a unique item. We are in the process of moving offices, so we're currently experiencing double rent. Towards the back end of the year, those things normalized. The marketing was more accelerated year to date than it will be in the back half. The incentive structures will balance out.

It's a bit more consistent through the year this year than last year.

Bonnie Herzog (MD)

Okay, that's helpful. I appreciate it. I'll pass it on. Thank you.

Moderator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Christian Junquera with BofA Securities. Your line is open. Please go ahead.

Christian Junquera (Equity Research Analyst Food and Beverages)

Hey, everyone. You have Christian on for Pete. Thanks for taking our question. First, on tariffs, just how potentially higher tariffs than the 10% baseline figure would impact EBITDA this year and potentially next year? You know, how confident are you guys in that you are going to see 10% tariffs? Thanks.

Martin Roper (CEO)

I think what we would say on tariffs is obviously there's a lot of uncertainty. We're currently operating under a 10% baseline tariff environment, and that is included in our guidance. Last quarter, we discussed how the tariffs would apply to our US-based product cost. We provided, I think, the estimate that you wanted to back into it. You took 6% of our global cost of goods dollars, and that would approximate to the dollar cost that we think the tariffs would equate to. That's sort of how you back into an estimate of tariff impact, let's say, at a 10% rate. You would come up with a number. Last quarter, we said if the retaliatory rates were applied, we expected the tariffs based on our current sourcing to be in the low 20%s as a percentage rate.

Obviously, since then, the announcements that have been happening haven't really aligned with retaliatory, so that's why we're not really talking about that. Many of the announcements that have happened have been announced frameworks for trade deals that we haven't seen details yet. Because we haven't seen details yet and we don't really know what's happening on August 1st, we're just not including it in any forward-looking statements. On the positive side, obviously, everyone's talking and deals are being negotiated that potentially are lower than the retaliatory rates. Also, on a positive side, there have been anecdotal comments that maybe commodities and agricultural goods that aren't available in the U.S. might be treated differently. It's all hypothetical, and there are no specifics.

It's very hard to comment on other than to say that we're operating the business and focusing on growth and assuming that once we know what the long-term impact on our business is, we can then make long-term plans to deal with it and to mitigate it to the best of our abilities. That's how we're thinking about it. Right now, we have as good as information as everyone else does in the market.

Christian Junquera (Equity Research Analyst Food and Beverages)

Okay. Got it. Just one more, a common theme from CPG earnings throughout this year has been how the Hispanic shopper is spending less, and that's putting pressure on companies. I believe you guys have sizable exposure towards the Hispanic consumer, yet you guys continue to post strong sales growth. Do you have any insights on the Hispanic consumer or why you seem to be insulated from this trend? That's it for me. Thanks, guys.

Martin Roper (CEO)

I don't think our consumer insights is robust enough to sort of pull it all apart. What we would say is our convenience store trends are very strong, and I think that's visible in the available scan data. To us, if there was weakness in the Hispanic consumer as it relates to our brand, that's probably where it would show up. I think that's where it's showing up on the BS side for those guys who are talking about it. We don't see it. I think for us, our consumers, while we do over-index to Hispanic and Asian and African American, we also tend to over-index to what I would call average wealth to above-average wealth households or income households. We probably are a little less exposed to the lower income brackets where maybe that is occurring. That's, again, just a guess. We don't have good data on it.

Frankly, given our trends, we're just focused on continuing them.

Moderator (participant)

Thank you. One moment as we move on to our next question. Our next question is going to come from the line of Eric Des Lauriers with Craig-Hallum Capital Group LLC. Your line is open. Please go ahead.

Eric Lauriers (Senior Research Analyst)

Great. Thank you for taking my questions, and congrats on continued very strong top-line results here.

Mike Kirban (Co-Founder and Executive Chairman)

Thanks, sir.

Eric Lauriers (Senior Research Analyst)

First one for me on private label. Just trying to help kind of just square the outlook here. We had some loss regions that impacted Q2. I think I heard from Martin that you perhaps won some additional private label contracts recently. I guess just from these levels in Q2, seasonally adjusted, should we expect modest growth going forward? I guess just overall how to think about potential volatility in private label in the coming quarters.

Martin Roper (CEO)

Yeah, great question, Eric. I think as we said earlier in the year that we lost some regions across multiple retailers. The first impact of that was visible in Q2. The forward-looking impact of that is, frankly, complicated because, like for instance, in Q3 last year, we had inventory issues relative to private label, and therefore the shipment comparisons are very easy. I think it's going to be pretty turbulent on a comparable basis for the balance of the year. What I would say is that Q2 reflects all the known losses that we are aware of, and it's probably a pretty good indication of what future trends might look like on a long-term basis. That being said, private label itself is pretty healthy right now, so you're seeing offsetting growth from the category.

On top of that, as we indicated, we have one additional piece of business that we're excited about. It won't impact until 2026. I think that's the best color I can provide you for your modeling. It's complicated and it's murky because of the year-over-year, but there's nothing new to report other than that we won something that will help us in 2026.

Eric Lauriers (Senior Research Analyst)

No, that's all very helpful. I appreciate that. Just a quick one on Walmart. Remind us the timing around shelf resets here and when you may have clarity on if Walmart will go through with these expanded distribution plans.

Martin Roper (CEO)

Timing is September, October, sometime. If they stick to last year's timing, right? Last year's timing was sort of November-ish. If they stick to an annual cadence, we would hope to make progress on this in early Q4.

Eric Lauriers (Senior Research Analyst)

Yeah. Great. Just the last one for me on Treats and kind of innovation as a whole. Very nice contribution from Treats early on. That's rolling out nationally. Can you just kind of comment on how you see the potential for the coconut milk-based beverages as a category? As you guys look at this, would this mostly be something similar to the Treats where it's a bit of a sweeter, like, indulgent option as opposed to some of the better-for-you aspects of coconut water? I guess just overall, should we be thinking of a shift in focus from you guys on the innovation front towards more coconut milk beverages and away from perhaps isotonics and energy drinks?

Mike Kirban (Co-Founder and Executive Chairman)

Definitely not away from. I think continuing to focus on coconut water as a great sport drink and as super refreshing and as used in all these incredible usage occasions from the hangover cure to cocktail mixers to smoothies to all of these things. I think as we think about coconut milk-based beverages, it's somewhat new to us. It's somewhat new to the U.S. It's a trend that's growing really quickly and has become quite large in other parts of the world, specifically Asia, China, throughout all of Asia, using coconut milk as a base for this kind of midday indulgent treat. You see it in all of the coffee shops. The top best-selling item is always a coconut milk-based refreshment. We think that that trend continues and really expands in North America and Western Europe and throughout the rest of the world.

It's something we want to be a driver of and a big part of. It's another avenue for growth, not necessarily taking away from the core, which is Vita Coco Coconut Water, which we think is still in its early days and has a huge opportunity to continue to grow as a hydration drink.

Eric Lauriers (Senior Research Analyst)

Got it. It's very helpful. Thank you for taking my questions.

Moderator (participant)

Thank you. One moment for our next question. Our next question is going to come from the line of James Salera with Stephens. Your line is open. Please go ahead.

Jim Salera (Equity Research Analyst)

Hey, guys. Good morning. Thanks for taking our question. Corey, I just wanted to maybe ask a quick housekeeping question. You mentioned 4Q gross margin improving sequentially from 3Q. Do we expect that to still be down from 2Q level, or if you can kind of level set that cadence for us, just for starters?

Corey Baker (CFO)

We haven't provided the quarterly expectation in Q4, especially due to the size is generally lower year-over-year, you know, throughout the year than us because of the size of the volume within the quarter and some of the fixed investments driving higher costs. What we do see in the more short term is that impact of tariffs at the beginning of Q3 with the delay of pricing driving it down from Q1. You get to the overall approximately 36% for the year based on the remainder of the year.

Jim Salera (Equity Research Analyst)

Okay. I certainly appreciate the difficulty of forecasting given all the new cycle and changing tariff rates. At least what's been announced is the negotiated rate for the Philippines is, I believe, 19%. If the assumption is a 10% baseline in your guidance, but we assume that the deal for the Philippines materializes as it's been reported, would it be safe to say that the full year, that 36% gross margin would probably, we would probably undershoot that a little bit if we run through a 19% tariff on the Philippines, even setting aside whatever ends up happening with Brazil?

Mike Kirban (Co-Founder and Executive Chairman)

I would say that, yes, the 19% has been announced. Yesterday, you know, Commerce Secretary Howard Lutnick on Squawk Box said that President Trump has agreed to set zero tariffs for those natural resources that are not grown in the U.S. in trade deals. We don't know. If we're looking at 19% from the Philippines, and if our average goes from 10% to 19% or 20% or whatever it is, we feel that we can manage that. Between margin mix in 2026, with more branded and branded growth, ocean freight rates declining, which we see happening and continuing to happen, and potentially some additional pricing, we think that if that does happen, we can manage the business accordingly.

Martin Roper (CEO)

Just to be clear, our guidance assumes 10% ongoing. It doesn't assume anything else. Certainly, in our mitigation efforts, once we know what the guidelines are or what the rules are, then we can mitigate. There is a lag, right? I think, long term, we're like, okay, we'll be totally fine. In the medium term, it's like, let's not do anything silly based on announcements that may not impact us because the details are in the details, but we don't have the details, right? That's how we're thinking about it. Our primary focus and our message to our team is let's continue to drive top-line growth and everything will be fine.

Jim Salera (Equity Research Analyst)

Great. Maybe just one quick follow-up on U.S. private label sales. I think in the quarter, they were just shy of $15 million. Is that a good dollar run rate to think about just kind of for the remainder of the year as we progress forward, you know, kind of in that $15 million range or any, you know, incremental upside downside to that?

Corey Baker (CFO)

The two pieces, what Martin says, Q2 is somewhat representative of the ongoing business. As we talked in the past, private label is hard to capture because the revenue is recorded a little bit differently, but we do see growth in the category overall and faster growth in private label across the category. Plus, the incremental business coming that Martin referenced in 2026. We would hope that that number continues to grow from a baseline.

Jim Salera (Equity Research Analyst)

Got it. Great. I appreciate all the detail, guys. I hope I can be cute.

Martin Roper (CEO)

Thank you. Thanks.

Moderator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Robert Edward Ottenstein with Evercore ISI. Your line is open. Please go ahead.

Robert Ottenstein (SMD and Partner)

Great. Thank you very much. Congratulations on the continued, tremendous success. What I want to do is kind of try to get a little bit beneath the hood in terms of that success and maybe understand a little bit about your marketing and category-building efforts in the U.S. that have been so successful. At this point, what particular demographics are you targeting for increased household penetration, if in fact, you're doing that? What particular categories or, I'm, you know, are you looking to gain share from or rather maybe occasions from? It's our sense that, you know, four or five years ago, it was more from kind of juice and water. Now maybe it's more sports drinks. Is that happening?

I'm just trying to understand a little bit about, you know, I know you're going into C-stores and that's working really well, but trying to understand maybe some of the brand-building marketing aspects of your growth strategy.

Mike Kirban (Co-Founder and Executive Chairman)

Thanks. Yeah, I think it's a lot of what we've been doing the last several years and continuing to do that. If we think about where we're pulling from, it remains pretty equal from three major categories, right? It's sport drinks, it's enhanced bottled water, and juice. That continues. We are, from a marketing perspective, for the first time in a few years, really focusing a little bit heavier than we might have historically on the sport drink aspect, both through our marketing and our communication. That seems to be working, and we're excited about that. In terms of demographics, we're growing across all demographics. We're focusing our marketing efforts on young, multicultural, more urban consumers, but it is spreading across all demographics. We're seeing significant growth in truck stops in the middle of the country. The category just seems to be working very well everywhere, which is exciting.

The focus of our marketing efforts remains the same that it's been the past couple of years.

Robert Ottenstein (SMD and Partner)

That's great. As a follow-up, is your strategy in terms of what you're focusing on along the lines that you just mentioned the same, pretty much the same in Europe, or are there nuances, regional nuances, whether it's in the U.K. or Germany that we should be aware of?

Mike Kirban (Co-Founder and Executive Chairman)

Pretty similar. I mean, there are regional nuances in terms of, you know, focus periods, whether it be Ramadan in the U.K. and these types of things that, you know, might be different focuses to Hispanic consumers in the U.S. during certain periods. For the most part, it is the same. It is targeting young multicultural consumers.

Martin Roper (CEO)

I think one slight difference in Europe is the category is underdeveloped relative to the U.S. I think that's a huge opportunity for us. There's a lot more category building and education we have to drive in Europe. Certainly, that message is being received pretty well because the growth rates are very healthy. It's very early in category development phase.

Robert Ottenstein (SMD and Partner)

No, super exciting. Thank you very much.

Martin Roper (CEO)

Thanks so much.

Moderator (participant)

Thank you. As a reminder, if you would like to ask a question, please press star one one. One moment for our next question. Our next question is going to come from the line of Michael Lavery with Piper Sandler. Your line is open. Please go ahead.

Michael Lavery (Senior Equity Research Analyst)

Thank you. Good morning. I just wanted to touch on freight rates. You mentioned you expect easing later in the year. Can you give a sense of maybe how much you're contracting or already securing for 2026? I think for recent quarters, you've mostly been more exposed to the spot rates and the contracted levels weren't as favorable. Has that changed? What's the kind of forward position that you're sitting on now?

Martin Roper (CEO)

Yeah, I think on a forward basis, we don't have much coverage on ocean freight rates. I think our view is still that they are sort of higher than long-term averages, that there is more downward pressure than upward pressure that we see right now, partly due to increased capacity and increasing demand. Obviously, it's pretty volatile. That's a consideration, but we think the volatility is manageable within our P&L and that we're better off mostly being spot and not making forward contracts given the downward pressures that we see. Ultimately, the big change in ocean freight for us would probably be if the Suez Canal route were to open up for Asia to Europe and Asia to the East Coast. That is obviously still shut down, although there were expectations it would open, but obviously, it's still shut down.

That's the big thing that we still think will eventually open, and that will drive rates down as a lot of extra capacity gets added just by the shortened transit time. We're sitting on the sideline, and we're comfortable with that. We think we can manage the volatility within our P&L, but that doesn't mean to say it won't cause volatility in our gross margins quarter to quarter if that volatility continues to happen.

Michael Lavery (Senior Equity Research Analyst)

Thank you. Just on a C-store and cans specifically, you've got a nice pickup in ACV there. It's still lower than, you know, sort of the grocery levels. What momentum are you seeing there? Is there a few chains in particular you've got a little more of a breakthrough? Is your selling story getting better? What's helping put some wind at your back there?

Martin Roper (CEO)

Yeah, I think we're happy, I suppose, with the increased ACV, but we're unhappy that it isn't going faster. Convenience store, I think, as you know, is, you know, there are a couple of big accounts that sort of get you to 20% ACV, and then it's a lot of independent decision makers with a lot of much smaller decision points. We're making progress. The good news is our selling story and our velocities are healthy. Where we've been able to add incremental distribution, like the one liter in 7-Eleven, for instance, it sticks and it's a very valuable SKU in that door. That's a message we can take on to the rest of that community. Currently comfortable with what's going on there. We obviously have work to do to keep driving juice. Yeah, feeling very good about our current C-store business and our trends there are very good.

Michael Lavery (Senior Equity Research Analyst)

Okay, thanks so much.

Moderator (participant)

Thank you. One moment for our next question. Our next question is going to come from the line of Glenn West with William Blair. Your line is open. Please go ahead.

Glenn West (Analyst)

Hey, guys. This is Glenn West on for John Anderson. You guys have hit on a lot. Maybe if I could just ask a couple of clarifying points on what you've talked about related to private label and then the Walmart situation. On private label, you talked about the new business coming in 2026. I'm just curious if that business is largely going to offset the losses we've seen and maybe we can expect to see kind of a substantial rebound in that segment or maybe how we can think about how that segment is going to perform in 2026.

Martin Roper (CEO)

We haven't disclosed details on the size of the business. What I think we would say is it's a large customer, but frankly, we don't really know what the volumes will be until they actually hit because this is a potential new program for them. It's not really an answer that we can answer other than we're going to try and plan to support a range of outcomes. As it relates to, you know, would it replace, I think it's very difficult to tell. It's a large customer. There's a wide range of outcomes. Honestly, we can't really say if it's going to replace. I think it would be a wonderful outcome for us if next year we were able to, you know, get private label back in the U.S. to flat for the year. That would be a good outcome and maybe even grow it.

The growth would come from the new account and also continue growth in private label business. It's so early to tell, and there's so much complexity. As we've said, private label is pretty lumpy in how these decisions get made that I really don't want to provide any sort of forward-looking guidance on that.

Glenn West (Analyst)

Thank you. On Walmart, do you guys have any early reads on the velocity of the SKUs you have in that new juice aisle? I know you frequently said it's higher foot traffic. Are those SKUs that you have turning much faster or any sort of insight you have there?

Corey Baker (CFO)

Yes. Our velocities at Walmart are really, I think they've grown 50+%. It's somewhat hard to tell from a traffic perspective because there's a large reduction of SKUs, but we're very happy with the velocity we're seeing on the SKUs that are in the stores. We're happy with the overall Walmart performance in general, considering the distribution losses. In the stores where we've maintained distribution, the brand continues to do very, very well. We're excited about the future of Walmart for sure.

Mike Kirban (Co-Founder and Executive Chairman)

The potential expanded distribution in that aisle with higher velocities.

Glenn West (Analyst)

Yeah, great news. I appreciate your guys' time. Thanks.

Martin Roper (CEO)

Thank you.

Mike Kirban (Co-Founder and Executive Chairman)

Thank you.

Corey Baker (CFO)

Thank you.

Moderator (participant)

Thank you. I'm showing no further questions at this time. I would like to hand the conference back over to Martin Roper for any further remarks.

Martin Roper (CEO)

Thank you, Michelle. I'd just like to thank everyone for joining our quarterly earnings call today and look forward to talking to you again in three months. Everyone, have a great day.

Moderator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.